Will Gold Decline As Economies Gradually Reopen?

Half the US States and countries like Italy and Germany are gradually easing lockdowns. Taking measured steps, the moves are broadly cheered. Rightfully so? And what does the reopening mean for the gold market?

Epidemics: Bad, Good, and Ugly

By May 6, 2020, more than total 3.6 million of confirmed cases have been reported in the world and more than 250,000 have already died from the COVID-19. In the United States, about 1.2 million of cases have been identified so far, and more than 71,000 people have died. This is bad news.

What is good is that the US epidemiological curve has flattened somewhat, which means that the growth pace of infections and deaths, has slowed down. As the charts below shows, the peaks in daily number of both confirmed cases and deaths are beyond us.

Chart 1: Daily confirmed COVID-19 cases (rolling 3-day average) in the US from February to May 6, 2020

Chart 2: Daily confirmed COVID-19 cases (rolling 3-day average) in the US from February to May 6, 2020

This is really great news, as it means that social distancing worked and we avoided the continuation of the exponential growth. However, the ugly truth is that the epidemic is far from over. As the chart below shows, the US epidemiological curve still remains steeper than for other countries. Indeed, its trajectory does not look still like the curve for China where the epidemic is practically over.

Chart 3: Daily confirmed cases per million people in the US compared to China and other countries.

And what is really disturbing is that the virus is mutating – the new study published by researchers at the Los Alamos National Laboratory found that the coronavirus that emerged in Wuhan, China, has mutated and the new, dominant and even more contagious strain is spreading across the U.S. So, it goes without saying that the virus can mutate further and arrive in autumn as an even more (or less, this is also possible) deadly slash contagious pathogen.

Countries and States Ease Lockdowns

But with flattened curved and the epidemic stabilizing, several European countries and more than a few US states are easing lockdowns. This is great news from the economic point of view. It was clear that economic shutdown could not last forever. However, this move is not without risks. The epidemiologists warn against the possibility of the second wave of infections in autumn, especially unless testing for the virus is expanded dramatically, which has not been done everywhere. Remember the Spanish flu? It attacked in three waves. And do you know why? Because many regions eased the restrictions too soon. We hope that the coronavirus will not return later this year, but, unfortunately, this is a possible scenario given the fact that we have not probably reached herd immunity yet.

Implications for Gold

What does the reopening of economies mean for the gold market? Given that the Great Lockdown took gold prices to about $1,700, does it imply that the Great Reopening will push gold down? Well, not necessarily.

Of course, given that a lot of bad news has been priced into gold prices, the easing of lockdown restrictions could spur optimism and diminish gold’s safe-haven appeal. The recent breaking news that the German high court has challenged the European Central Bank’s bond-buying authority has already weakened the euro against the US dollar, which can create downward pressure on the gold prices. And in our Gold Trading Alerts, we have warned Readers that, based on technical factors (e.g., the speculative interest in the gold market is very high), gold could go lower in the short-term, before it would go much higher.

However, investors should remember that the restrictions will be eased only gradually. And we could see second waves, at least in some places. And social distancing will not disappear during one night, so the economic recovery could be less vigorous than many people hope for. So, a lot of uncertainty will remain in the marketplace, supporting the gold prices (eroding U.S.-China trade relations can also help here). Moreover, when the lockdowns end, investors could shift their attention to the negative consequences of ultra easy monetary and fiscal policies, such as the very low real interest rates and high public debts.

To sum, although the price of gold could drop in the short-term, there is still room for further upward move later this year, as investors should continue to buy gold as an insurance against the huge increase in the money supply and the federal debt, as well as against the geopolitical risks (Trump’s erratic stance on the epidemic changes the presidential race) and against the second wave of coronavirus.